HEEP Releases Major Research Paper on Energy Efficiency

January 28, 2015

The Harvard Environmental Economics Program—together with the Duke University Energy Initiative—has released a paper titled “Assessing the Energy-Efficiency Gap.” The “energy-efficiency gap” refers to the apparent phenomenon that energy-efficient technologies, while offering considerable promise for reducing the financial costs and environmental damages associated with energy use, are not adopted by consumers and businesses to the degree that would seem be justified, even on a purely financial basis.

The paper explores possible explanations for the energy-efficiency gap. It is the culmination of a two-year research project supported by the Alfred P. Sloan Foundation and directed by Richard Newell, Gendell Professor of Energy and Environmental Economics at Duke University’s Nicholas School of the Environment and Director of the Duke University Energy Initiative, and Robert Stavins, Albert Pratt Professor of Business and Government at the Harvard Kennedy School and Director of HEEP. The project web page is here.

Professors Newell and Stavins—and Todd Gerarden, a Ph.D. student in Public Policy at Harvard University—authored the paper.

The paper draws in part from a research workshop held at the Harvard Kennedy School in October 2013, in which most of the U.S.-based scholars (primarily, but not exclusively, economists) conducting research on the energy-efficiency gap participated. HEEP co-sponsored a second such research workshop with the Centre for European Economic Research (ZEW) in Mannheim, Germany in March 2014, where European economists explored the same topic. Closely-related research was presented by panelists at the annual conference of the Allied Social Science Association in January 2015. The panel is described here.

Abstract of the paper:

Energy-efficient technologies offer considerable promise for reducing the financial costs and environmental damages associated with energy use, but these technologies appear not to be adopted by consumers and businesses to the degree that would apparently be justified, even on a purely financial basis. We present two complementary frameworks for understanding this so-called “energy paradox” or “energy-efficiency gap.” First, we build on the previous literature by dividing potential explanations for the energy-efficiency gap into three categories: market failures, behavioral anomalies, and model and measurement errors. Second, we posit that it is useful to think in terms of the fundamental elements of cost-minimizing energy-efficiency decisions. This provides a decomposition that organizes thinking around four questions. First, are product offerings and pricing economically efficient? Second, are energy operating costs inefficiently priced and/or understood? Third, are product choices cost-minimizing in present value terms? Fourth, do other costs inhibit more energy-efficient decisions? We review empirical evidence on these questions, with an emphasis on recent advances, and offer suggestions for future research.